Continuing
the Growth
Journey
Embedded Value Report 2016
Embedded
Value Report
2016
Brussels, 7 April 2017
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Ageas – Embedded Value Report 2016
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Ageas – Embedded Value Report 2016
CONTENTS
1
2
3
4
HIGHLIGHTS 2016 Embedded value results ...................................................................................4
1.1
Highlights of 2016 Embedded Value .................................................................................................................................. 4
1.2
Value Added by New Business ........................................................................................................................................... 5
Movement Analysis ..........................................................................................................................6
2.1
Restatement 2015 Embedded Value .................................................................................................................................. 7
2.2
Expected Return.................................................................................................................................................................. 7
2.3
Experience variances and Operating assumption changes ............................................................................................... 8
2.4
Value Added by New Business ........................................................................................................................................... 9
2.5
Variance in Investment Income – Changes in Market Conditions .................................................................................... 10
2.6
Equity Reconciliation ......................................................................................................................................................... 11
Sensitivity analysis .........................................................................................................................12
Embedded Value at Ageas ............................................................................................................13
4.1
Principles ........................................................................................................................................................................... 13
4.2
Statement of directors ....................................................................................................................................................... 13
4.3
Value Added by New Business ......................................................................................................................................... 13
4.4
Scope ................................................................................................................................................................................ 13
4.5
Covered business ............................................................................................................................................................. 13
4.6
Economic assumptions ..................................................................................................................................................... 14
4.7
Operating assumptions ..................................................................................................................................................... 17
4.8
Required equity ................................................................................................................................................................. 17
4.9
Expected return ................................................................................................................................................................. 17
4.10 Equity reconciliation .......................................................................................................................................................... 18
4.11 Sensitivities ........................................................................................................................................................................ 18
5
6
Cautionary statements ...................................................................................................................19
Limited assurance report on the Ageas Embedded Value report 2016 .........................................20
6.1
Introduction ....................................................................................................................................................................... 20
6.2
Ageas’ responsibilities ...................................................................................................................................................... 20
6.3
Our Responsibilities .......................................................................................................................................................... 20
6.4
Criteria ............................................................................................................................................................................... 21
6.5
Conclusion......................................................................................................................................................................... 21
6.6
Other matters..................................................................................................................................................................... 21
Annex I: Components of Embedded Value ................................................................................................22
1
Value of Shareholder’s Equity (VSE) ................................................................................................................................. 22
2
Value of In-Force business (VIF) ....................................................................................................................................... 23
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Ageas – Embedded Value Report 2016
1 HIGHLIGHTS 2016 Embedded value results
This document only covers the consolidated Life insurance activities that are controlled by Ageas and the equity associates are thus not taken into
account. Compared to last year Ageas Asia Holdings in Hong Kong is out of scope following the sale of the company in May 2016. The newly acquired
Life business of Ageas Seguros is out of scope for Embedded Value for 2016.
The concepts of Embedded Value are further explained in Annex I.
KPMG has performed a limited assurance review on this Embedded Value Report. Their report is included in Chapter 6.
All amounts are reported in millions of EURO unless stated otherwise.
1.1
Highlights of 2016 Embedded Value
Highlights Embedded Value
Embedded Value previous Year-end restated (Year-start)
2016
2015
2015
Total
Total
Total
Insurance
Insurance excl. Asia
Insurance
4,533
4,801
5,729
Operating Embedded Value Earnings
412
295
345
Operating return on Embedded Value Year-end restated
9.1%
6.1%
6.0%
Total return on Embedded Value before dividend - Year-end restated
197
182
274
Total return on Embedded Value before dividend - Year-end restated in %
4.3%
3.8%
4.8%
Dividends paid
( 243 )
( 283 )
( 283 )
Embedded Value Year-end
4,487
4,700
5,720
Ageas broadly maintained the same level of return (before dividend) on Embedded Value, despite the continuous low interest rate environment.
The Operating return on Embedded Value improved due to alignment on returns of the Strategic Asset Allocation assumptions (for more details refer
to paragraph 2.2). Actual equity market movements have led to a limited increase in Total return on Embedded Value before dividend.
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Ageas – Embedded Value Report 2016
1.2
Value Added by New Business
Value added by New Business
2016
2015
Change
Total Insurance
Value Added by New Business
Present value New Business premiums
Margin
57
95
( 40.4% )
3,614
4,656
( 22.4% )
1.6%
2.0%
Belgium
Value Added by New Business
Present value New Business premiums
Margin
35
65
( 46.8% )
2,658
2,924
( 9.1% )
1.3%
2.2%
Continental Europe
Value Added by New Business
22
21
Present value New Business premiums
956
1,131
Margin
2.3%
5.8%
( 15.5% )
1.8%
Asia
Value Added by New Business
9
Present value New Business premiums
601
Margin
1.5%
The Present value of New Business premiums decreased by 9.1% in Belgium and by 15.5% in Continental Europe. While the margins for Unit Linked
and Risk products (Term business) remained stable compared to last year, the margins in Savings products are under pressure due to persisting low
interest rates. A more detailed analysis is included in section 2.4.
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Ageas – Embedded Value Report 2016
2 Movement Analysis
The Movement Analysis explains the movement in Embedded Value over the year 2016 by showing the different underlying components. The underlying
principles are described in more detail in chapter 4 and the background on Value Added by New Business (VANB) is covered in section 2.4
2016
Total
Embedded Value
Insurance
Embedded Value previous Year
5,720
Divestiture
2015
Continental
Belgium
Europe
4,175
525
Asia
1,020
( 1,020 )
Insurance
5,691
Continental
Belgium
Europe
4,244
551
Asia
896
( 1,020 )
Opening adjustments
( 167 )
( 225 )
Embedded Value previous Year-end restated (Year-start)
4,533
3,950
Expected return
Total
58
38
26
583
5,729
4,270
( 20 )
32
531
928
322
278
44
219
149
33
37
Experience variance and assumption changes
33
51
( 18 )
31
38
( 11 )
4
Value added by New Business
57
35
22
95
65
21
9
412
364
48
345
252
43
50
Operating return on Embedded Value Year-end restated
9.1%
9.2%
8.3%
6.0%
5.9%
8.1%
5.4%
Variance on Investment income
( 69 )
11
( 80 )
58
100
(8)
( 34 )
Operating Embedded Value Earnings
Changes in Interest rates and market conditions
( 146 )
( 143 )
(3)
( 129 )
( 195 )
( 10 )
76
197
232
( 35 )
274
157
25
92
9.9%
Total return before dividend
on Embedded Value Year-end restated
Total return before dividend on
4.3%
5.9%
Dividends paid
Embedded Value Year-end restated in %
( 243 )
( 243 )
Embedded Value Year-end
4,487
3,939
(6.0%)
548
4.8%
3.6%
4.7%
( 283 )
( 252 )
( 31 )
5,720
4,175
525
1,020
Elements of the Movement Analysis above are discussed in more detail in the subsequent paragraphs.
Breakdown of Embedded Value
Free
Embedded Value Movement analysis
Previous Year-end restated (Year-start)
Surplus +
Required
Equity +
Value of
2016
In-force
Embedded
business =
Value
Free
Surplus +
Equity +
Value of
2015
In-force
Embedded
business =
Value
775
1,759
1,999
4,533
4
32
286
322
340
( 12 )
( 328 )
Experience variance and assumption changes
( 448 )
451
30
33
380
( 356 )
7
31
Value added by New Business
( 141 )
117
81
57
( 221 )
130
186
95
( 112 )
( 14 )
( 69 )
(7)
( 33 )
98
( 188 )
( 146 )
88
( 94 )
1,866
4,487
Expected return
Transfer to Shareholder's Equity
Variance on Investment income
57
Changes in Interest rates and markets conditions
42
Dividends paid
Year-end
( 243 )
386
( 243 )
2,235
316
Required
2,466
2,947
5,729
( 12 )
28
203
219
400
6
( 406 )
( 129 )
2,912
5,720
( 283 )
661
58
( 123 )
( 283 )
2,147
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Ageas – Embedded Value Report 2016
2.1
Restatement 2015 Embedded Value
2016
Total
Restatement of Embedded Value
Insurance
Embedded Value previous Year
Belgium
Europe
4,175
525
5,720
Divestiture
2015
Continental
( 1,020 )
Total
Asia
1,020
Insurance
5,691
( 1,020 )
Opening Adjustments
( 167 )
( 225 )
Embedded Value previous Year-end restated (Year-start)
4,533
3,950
58
38
583
5,729
The main restatements relate to:

The sale of Ageas Asia Holdings in Hong Kong, with an Embedded value of EUR 1,020 million as at 31 December 2015;

Alignment of the valuation methodology with market practice amounts to EUR -143M for Belgium and EUR 21 million for Continental Europe.

An adjustment of the required capital to reflect the Solvency II Ageas target capital for EUR -95 million and a capital injection in Continental
Europe for an amount of EUR 50 million.
2.2
Expected Return
The principles of the Expected Return are described in paragraph 4.9.
Free
Expected Return
Embedded Value previous Year-end restated (Year-start)
Operating assumption changes
Embedded Value Year-end restated after assumption changes
Surplus
775
( 431 )
Required
+
Equity
1,759
437
+
Value of
2016
2015
In-force
Embedded
Embedded
Value
Value
business
1,999
( 29 )
=
4,533
( 23 )
5,729
17
344
2,196
1,970
4,510
5,746
Expected return
4
32
286
322
219
- reference rate
0
1
1
2
17
0.1%
0.0%
0.1%
0.0%
0.3%
- in % of Embedded Value Year-end restated after assumption changes
- in excess of reference rate
- in % of Embedded Value Year-end restated after assumption changes
4
1.1%
31
285
320
202
1.4%
14.5%
7.1%
3.5%
The Operating assumption changes are further explained in section 2.3.
The basis for the expected return is the reference rate 1 at the start of the year. The EUR-reference rate decreased from 0.25% in 2015 to 0.06% in
2016. This explains the decrease in reference rate expected return. The expected return in excess of reference rate as a percentage of Embedded
Value has increased due to the fact that the risk premiums for shares and real estate have been reassessed for 2016, as detailed in section 4.6.4.
1)
The reference rate is further defined on page 14, paragraph 4.6.1,
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Ageas – Embedded Value Report 2016
2.3
Experience variances and Operating assumption changes
The underlying principles of the operating assumptions are described in paragraph 4.7.
Free
Detail on Experience variances and Operating assumption changes
Experience variances and Operating assumption changes
Non-economic variance
Impact of operating assumptions
Surplus +
Required
Value of
2016
2015
In-force
Embedded
Continental Embedded
Equity + business =
Value= Belgium+
Europe+
Value
( 448 )
451
30
33
51
( 18 )
31
( 17 )
14
59
56
68
( 12 )
14
( 431 )
437
( 29 )
( 23 )
( 17 )
(6)
17
Mortality / Morbidity
Costs (expenses / commissions)
Lapse / renewals
6
6
2
4
11
11
36
( 25 )
( 32 )
21
( 12 )
11
11
14
(3)
( 76 )
( 70 )
( 94 )
24
42
42
42
( 71 )
( 71 )
( 58 )
(1)
(1)
1
(2)
8
8
4
4
( 24 )
Cost inflation
10
10
8
2
25
Other
31
31
28
3
13
Tax
6
Premium Persistency
Level of Required Equity
Change in target asset mix / asset investment rules
Profit sharing rules
( 437 )
437
27
( 74 )
( 13 )
71
2
The overall impact of the Experience variances and Operating assumption changes on the Embedded Value remains at a comparable level compared
to last year.
The main changes in operating assumptions can be summarised as follows:

Impact from costs is positive for an amount of EUR 11 million, mainly due to a decrease in maintenance costs for Belgium.

The tax impact in Belgium decreased the Embedded Value with EUR 94 million due to a decrease in the regulatory Notional Interest Deduction
benefits, while in Continental Europe new tax legislation foresees a lower tax rate on future earnings reflecting a gain in value of EUR 24 million.

Positive impact from Premium persistency for EUR 42 million in Belgium is mainly due to turnover premium volume in the Employee Benefits
business.

Following the implementation of the Ageas Solvency II target capital, the Level of Required Equity has been further updated based on the 2016
evolution. Overall impact on Embedded Value amounts to EUR -71 million.
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Ageas – Embedded Value Report 2016
2.4
Value Added by New Business
The table below gives a breakdown of the Value Added by New Business (VANB) for the various Life segments, including the key indicators for sales
and margins.
2016
2015
Total
Value Added by New Business
Value Added by New Business
Insurance
Belgium
Continental
Total
Europe
Insurance
57
35
22
95
( 24 )
( 19 )
(5)
( 91 )
81
54
27
186
91
61
30
3
3
Cost of Non-hedgeable risks
(6)
(4)
(2)
(9)
Cost of Capital
(7)
(6)
(1)
( 12 )
New Business Strain
Value of In-force business
Present Value Future Profits
Time value of Financial Options and Guarantees
Total
Value Added by New Business
234
( 27 )
Continental
Insurance
Belgium
Europe
VANB Current Year
57
35
22
VANB Previous Year
95
65
21
PVNBP Current Year
3,614
2,658
956
PVNBP Previous Year
4,656
2,924
1,131
VANB/PVNBP Current Year
1.6%
1.3%
2.3%
VANB/PVNBP Previous Year
2.0%
2.2%
1.8%
Asia
Value Added by New Business Evolution
9
Present Value New Business Premiums (PVNBP)
601
Sales & Margins PVNBP basis
VANB/PVNBP Previous year - excluding AICA
1.5%
2.1%
Annualised premium Equivalent (APE)
APE Current Year
424
327
97
APE Previous Year
510
309
116
85
Sales & Margins APE basis
VANB/APE Current Year
13.4%
10.6%
22.7%
VANB/APE Previous Year
18.7%
21.2%
18.0%
VANB/APE Previous Year - excluding AICA
20.3%
10.7%
General
Continental Europe
The VANB in 2016 amounted to EUR 57 million. Margins on Unit Linked
and Risk products remained stable. Margins on Savings products have
decreased due to the persistent low interest rate environment.
While the value for Savings products has been under pressure, the
overall margin increased slightly due to a volume increase in Unit
Linked business.
Belgium
Changes in the product mix (higher Savings, less Unit Linked products)
resulted in a lower margin.
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Ageas – Embedded Value Report 2016
2.5
Variance in Investment Income – Changes in Market Conditions
2016
2015
Total
Variance in Investment Income, Changes in Market Conditions
Variance in Investment Income
Shares
Insurance

Europe
Insurance
11
( 80 )
( 65 )
( 50 )
( 15 )
8
(3)
24
2
(3)
( 15 )
59
( 59 )
41
(3)
Unit Linked funds
(1)
Fixed Income

Total
( 69 )
Real Estate
Changes in Interest Rates and Market Conditions
Belgium
Continental
( 146 )
( 143 )
(3)
58
( 129 )
The Variance in Investment Income reflects the impact of deviations between actual experience and expectations during the year with respect
to economic risk factors. The further decrease of credit spreads in Belgium has led to the positive variance on fixed income, offset by a lower
than expected performance in shares, while in Continental Europe the spreads increased on Portuguese bonds leading to a negative impact on
fixed income.
Changes in Interest Rates and Market conditions reflect the year-end market assumptions. The overall negative impact is mainly due to the
lower interest rates at year end 2016 compared to 2015.
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Ageas – Embedded Value Report 2016
2.6
Equity Reconciliation
The table below provides an overview of the adjustments made to the IFRS group Shareholder’s Equity to arrive at the Embedded Value as
at 31 December 2016. The detailed principles are described in paragraph 4.10.
2016
Equity Reconciliation
Total IFRS Shareholder's Equity
Activities not included in Embedded Value *
2015
Non-Life &
General
Non-Life &
General
Life Other Insurance
Account
Life Other Insurance
Account
6,371
2,585
604
8,040
2,006
1,330
( 1,809 )
( 2,585 )
( 604 )
(2,087 )
( 2,006 )
( 1,330 )
IFRS Shareholder's Equity of activities
included in Embedded Value
4,562
5,953
Adjustments from IFRS to EEV
Deduction Deferred Acquisition Costs
( 77 )
( 486 )
Deduction of Intangible Assets (Goodwill/VOBA)
( 211 )
( 417 )
Valuation adjustment Technical Provisions
3,708
2,863
Market value adjustments
2,108
1,865
( 7,610 )
( 7,041 )
Reallocation of UCG to assets backing provisions
Adjustments for participation differences
141
71
Value of Shareholder's Equity **
2,621
2,808
Value of In-Force Business **
1,866
2,912
Embedded Value Year-end
4,487
5,720
*
**
The “Activities not included in Embedded Value” mainly relate to the Equity Associates and Ageas Seguros Life, which is out of scope for 2016.
The definition of “Value of Shareholder’s Equity” and ”Value of In-Force Business” are described in Annex I.
Major changes year-on-year in the Deferred Acquisition Cost and Intangible Assets relate to the sale of Ageas Asia Holdings.
Other changes mainly relate to market movements.
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Ageas – Embedded Value Report 2016
3 Sensitivity analysis
Note that all sensitivities are performed without any management actions, e.g. the sensitivity Reference Rate – 100bp assumes the same technical
interest rate as of today for Value New Business. The principles of the sensitivities are described in detail in paragraph 4.11.
2016
2015
Total
Sensitivities - Embedded Value
Insurance
Belgium
Continental
Total
Europe
Insurance
Embedded Value Year-end
4,487
3,939
548
Reference rate +100bp
3.4%
3.4%
3.5%
1.9%
Reference rate -100bp
( 9.3% )
( 9.6% )
( 7.5% )
( 5.8% )
Asset values shares and real estate -10%
( 8.0% )
( 8.3% )
( 5.4% )
( 4.8% )
0.0%
0.0%
( 0.4% )
( 0.3% )
Volatilities risk-free yields +25%
( 3.3% )
( 3.4% )
( 2.5% )
( 2.9% )
Volatility Adjuster 0 bp
( 5.5% )
( 5.2% )
( 7.5% )
( 9.1% )
Volatility Adjuster +10 bp
4.9%
4.7%
5.8%
2.6%
Required Equity (SII Pillar 1)
6.8%
7.5%
1.7%
0.8%
Costs -10%
3.0%
2.9%
3.3%
3.2%
Mortality rates -5%
( 0.1% )
0.0%
( 1.0% )
0.4%
Lapse rates -10%
1.0%
1.0%
0.8%
1.4%
Volatilities equities and properties +25%
2016
2015
Total
Sensitivities - Value Added by New Business
Value New Business
Insurance
5,720
Belgium
57
35
Reference rate +100bp
24.6%
43.9%
Reference rate -100bp
( 39.9% )
( 68.9% )
Continental
Total
Europe
Insurance
22
95
( 5.8% )
14.0%
5.7%
( 28.7% )
0.6%
1.7%
( 1.3% )
( 4.0% )
( 6.6% )
( 7.7% )
( 4.8% )
( 6.4% )
( 14.4% )
( 17.7% )
( 9.3% )
( 27.7% )
Volatility Adjuster +10 bp
12.5%
16.0%
7.1%
Required Equity (SII Pillar 1)
19.0%
28.5%
4.1%
3.6%
Costs -10%
13.5%
20.6%
2.2%
11.5%
Volatilities equities and properties +25%
Volatilities risk-free yields +25%
Volatility Adjuster 0 bp
Mortality rates -5%
Lapse rates -10%
8.1%
1.6%
2.1%
0.6%
6.0%
10.6 %
15.3%
3.2%
18.7%
The sensitivities over 2015 include Ageas Asia Holdings, the numbers have not been restated. Leaving this company out for 2015 will not materially
change the outcome.
The sensitivity on the required capital in 2016 is not comparable with 2015, due to the change of scope. The sensitivity performed in 2016 on the
Required Equity relates to the Solvency II Pillar 1 required capital.
The sensitivity on interest rate curve drop of 100% increased due to the interest base curve which is lower compared to last year.
Note that as from 2016, the interest rate term structure is no longer floored to zero, hence the impact is also larger compared to last year.
The reference rate +/- 100bp on the VANB for Continental Europe has an impact opposite to Belgium and is mainly due to the profit sharing
mechanism in France.
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Ageas – Embedded Value Report 2016
4 Embedded Value at Ageas
4.1
Principles
Ageas’s Embedded Value Report complies with the following guidance
issued by the CFO Forum:

European Embedded Value (EEV) Principles, issued April 2016;

Additional Guidance on European Embedded Value Disclosures,
issued April 2016.
In addition to these principles, Ageas applies principles 2- 6, 7.1, 7.2,
7.4, 8, 9.1 – 9.3, 9.8, 10, 11.1 – 11.5, 11.7 – 11.10, 11.13, 11.15 – 11.16,
12 - 16, 17.1 – 17.2 from the Market Consistent Embedded Value
(MCEV) Principles, updated in April 2016.
Ageas’s Embedded Value reporting is a supplementary reporting to
the primary financial statements and represents a measure of the
shareholders’ interest in Ageas’s Life insurance businesses,
comprising the market value of the Shareholder’s Equity plus the
value of the operating business. Annex I gives a detailed description
of these elements.
4.2
Statement of directors
We confirm that this Embedded Value Report has been prepared in
accordance with the EEV Principles as detailed in paragraph 4.1. The
Board of Directors reviewed the Embedded Value Report on 4th April
2017 and authorized its issuance.
4.3
Value Added by New Business
4.4
Scope
All amounts in the tables of this Embedded Value Report are
denominated in millions of euro, unless stated otherwise.
The Embedded Value of Life insurance operations provides additional
information on the value of existing contracts and acquired new
business and is based on a market consistent approach.
Ageas is organised into six operating segments:

Belgium;

United Kingdom (UK);

Continental Europe;

Asia;

Reinsurance;

General Account.
4.5
Covered business
The scope of this Embedded Value Report covers value that arises from
Life insurance contracts sold through Ageas’s consolidated Insurance
entities. It does not include any of the Non-Life activities, such as
Property & Casualty Insurance, the General Account and the nonconsolidated Asian and European partnerships. These activities are
considered non-covered businesses.
The VANB represents the Value Added by New Business written in the
period, and is calculated in a similar way as the Embedded Value. It is
calculated as the value of the new business written in 2016 and value
In-Force at 31 December 2016 plus the first year losses (New Business
Strain).
The Ageas’s Life entities included in the scope of Embedded Value are:

AG Insurance in Belgium, with Ageas’s share of 75%;

Continental Europe, which includes:
­
Ageas France in France;
­
Millenniumbcp Ageas in Portugal, with Ageas’s share of
51%.
The Value Added by New Business includes only contracts sold during
2016 and does not include future new business.
The newly acquired Life business of Ageas Seguros is out of scope for
Embedded Value for 2016 based on materiality.
Ageas Asia Holdings in Hong Kong is out of scope following the sale of
the company in May 2016.
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Ageas – Embedded Value Report 2016
On 12 May 2016, Ageas confirmed the completion of the sale of its Life
insurance business in Hong Kong to JD Capital (Beijing
Tongchuangjiuding Investment Management Co.) for a total
consideration of EUR 1.22 billion. As the shares were held by Ageas
Insurance International, which is not part of the scope of this report, the
proceeds are not included in this report.
The business in scope includes Life business, such as Traditional Life,
Term, Annuities, Unit-Linked, Universal Life and Group Business.
Accident and health products sold through the relevant entities are
considered Non-Life products and are therefore treated as not covered
business. Only in the event that types of products appear as a policy
rider to Life business, is their value included in the Embedded Value
calculations.
In our IFRS Financial Statements, AG Insurance and Millenniumbcp
Ageas have been 100% consolidated. For Embedded Value reporting
purposes, these businesses are included for the share Ageas holds in
them, as mentioned above.
The subordinated liabilities issued by the entities of the covered
business have been valued on the basis of the credit rating of the
issuing entity.
4.6
Economic assumptions
4.6.1
Reference rates
For 2016 reporting purposes, Ageas has used the reference term
structures which are in line with valuation parameters set out by EIOPA
under Solvency II. A volatility adjustment is applied to the zero coupon
yield curve.
Ageas uses a stochastic economic scenario generator to produce
1,000 arbitrage free scenarios of future investment returns on each
asset class, based on the reference rate mentioned above and the
volatilities given in section 4.6.2.
Risk free
The risk free rate is derived from the forward zero coupon yield curve
which is reduced by 10 bps to 35 bps credit spread until the last liquid
point. The forward zero coupon yield curve is derived from the swap
curves at 31 December 2016 for the relevant currencies and these are
sourced from market sources for rates up to year 20 for the EUR. For
rates beyond this maturity, the extrapolation method (Smith-Wilson) is
used to converge from the last observed liquid market data point to an
unconditional ultimate long term forward rate. Similar to last year’s
valuation methodology Ageas applies a convergence period of 40
years which is recommended by the Solvency II guidelines and which
is applied by peers.
Samples of the zero coupon spot rates up to year 30 are plotted in the table below and in the graph on the next page.
2016
Zero coupon spot rates
Euro
2015
Euro
HKD
USD
1 yr
( 0.30% )
( 0.16% )
0.46 %
0.77 %
5 yr
( 0.02% )
0.23 %
1.31 %
1.65 %
10 yr
0.57 %
0.92 %
1.70 %
2.14 %
15 yr
0.96 %
1.34 %
1.94 %
2.37 %
20 yr
1.12 %
1.53 %
2.25 %
2.50 %
015
Ageas – Embedded Value Report 2016
2,50%
2,00%
1,50%
1,00%
0,50%
0,00%
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
-0,50%
2016 EUR rate
2015 EUR rate
Volatility Adjuster (VA)
Ageas applies a volatility adjuster to the risk free interest rate term structure. The VA is derived for EUR following EIOPA specifications. Compared to
last year the VA for the EUR has decreased with 9 bps.
Volatility Adjuster
2016
2015
EUR
13
22
HKD
N/A
64
USD
N/A
81
4.6.2
Volatilities
The scenarios used in the economic scenario generator are calibrated to fit to market data at the valuation date with the aim of achieving certain target
of accuracy set by the group. One single set of scenarios has been produced for the entities in scope. The economic scenarios are produced by our
centralized group tool.
Throughout the year, the normal swaption implied volatilities remained rather stable, contrary to the much more volatile course of the lognormal/black
implied volatilities, which were used in last year’s Embedded Value.
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Ageas – Embedded Value Report 2016
Volatilities
2016
2015
10 yr Sample swaption quote
5 yr option / 10 yr option
EUR
0.72% / 0.73% *
32.4% / 34.3%
15 yr Sample swaption quote
5 yr option / 10 yr option
EUR
0.69% / 0.68% *
35.0% / 37.9%
Real Estate
Imo APFIPP Index
EUR
2.9%
2.9 %
REBE Funds
EUR
13.7%
14.5 %
REBE Offices
EUR
7.8%
7.3 %
MSCI EMU
EUR
11.8%
24.3 %
MSCI US
USD
9.6%
19.5 %
MSCI Europe Ex EMU
EUR
11.0%
25.0 %
PSI 20
EUR
13.0%
24.2 %
MSCI World Free
USD
8.0%
16.1 %
MSCI Far east ex Japan
USD
12.7%
19.6 %
EUROSTOXX50
EUR
19.8%
19.4 %
SP500
USD
16.4%
17.5 %
Equity
*The sample swaption quotes are not comparable to last year due to model changes on the calibration of interest rate volatilities.
4.6.3
Actual and Target asset mix
The table below provides information on the asset mix.
The long-term Target Asset Mix represents the investment mix used in
the projections to which the actual investment portfolio is gradually
rebalanced. The Target Asset Mix is measured on a market value basis
for assets backing policyholder liabilities. The change in investment
portfolio from the actual to the Target Asset Mix has an impact on
Certainty Equivalent Value (CEQ) and TFOG and hence the Embedded
Value.
The actual asset mix is the investment portfolio in the balance sheet as
at 31 December 2016. It excludes assets held in funds for which the
policyholder bears the investment risks and assets backing
shareholder’s equity which do not impact the Time value of Financial
Options and Guarantees (TFOG). In the table the assets are classified
according to their economical characteristic, e.g. equities in fixed
income funds are classified as fixed income.
The economic scenarios have been generated taking into account target correlations between the major asset classes, being equities, real estate and
fixed income.
2016
Total Insurance
Belgium
Continental Europe
Asset mix - operating business
Actual
Target
Actual
Target
Actual
Target
Fixed income
93.2%
88.4%
88.7%
88.1%
88.1%
90.7%
Shares
3.0%
2.6%
3.1%
2.7%
2.4%
2.0%
Real Estate
8.6%
8.7%
8.8%
9.2%
6.9%
4.8%
Asia
Actual
Target
2015
Total Insurance
Belgium
Continental Europe
Asia
Asset mix - operating business
Actual
Target
Actual
Target
Actual
Target
Actual
Target
Fixed income
89.0%
89.1%
88.2%
88.1%
90.7%
93.4%
98.6%
98.0%
Shares
2.8%
2.6%
2.9%
2.6%
2.5%
2.5%
1.4%
2.0%
Real Estate
8.2%
8.3%
8.9%
9.3%
6.8%
4.1%
0.0%
0.0%
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Ageas – Embedded Value Report 2016
4.6.4
Real world investment return assumptions
The assumed investment returns include future investment risk
premiums that are used to generate the expected return in the
Movement Analysis. The real world investment return assumptions used
in this report are:
4.7.3
Operating assumptions
Each entity sets operating assumptions such as mortality and lapse
rates at best-estimate level, based on its knowledge of the local
markets and experience studies. All assumptions are reviewed each
year and revised if required.

4.7.4
Tax
Both local corporate tax and local taxes e.g. dividend taxes have been
incorporated in the calculation of the Embedded Value based on the
local tax position and local applicable tax rates. If this leads to deferred
tax assets, an assessment has been made to determine that
appropriate tax rates have been applied to direct and indirect returns
on equities, real estate and fixed income. In all other cases the
appropriate local corporate tax rate is applied.
Equities;
The Equity Risk Premium has been assumed to be 710bps above
the reference rate (2015: 300 bps). This assumption is now
aligned with the one of the Strategic Asset Allocation study.

Real Estate;
The real estate risk premium has been assumed to be 600bps
above the reference rate (2015: 200 bps). This assumption is now
aligned with the one of the Strategic Asset Allocation study.

Debt Securities;
The investment return on debt securities real world projections
are based on actual cash flows (coupons and principles).
Any deviation as a result of defaults or spread changes is included in
the “Variance on investment return” in the analysis of change.
4.7.5
Premium persistency
Each entity sets premium persistency rates at best-estimate level,
based on its knowledge of the local markets and experience studies.
All assumptions are reviewed each year and revised if required.
4.7.6
Profit sharing
Based on contractual obligations and management actions, profit
sharing dividends are reflected in the group modeling platform and
included in the Embedded Value calculations as a future outgoing cash
flow.
Note that these assumptions do not influence the final valuation, since
higher expected returns, will have an equally opposite effect on the
variance, representing the difference between actual and Expected
Return.
4.8
4.7
The required equity has been calculated as set out in section 1.1. of
Annex I.
Operating assumptions
4.7.1
Expenses
Modeled expenses start at the actual 2016 expense level and are
modeled taking into account the assumed inflation rate over the
projection period. Future commission payments follow the schemes
agreed with the parties entitled to the payments. No account is taken
of the effect of future expense reduction program, productivity gains or
integration synergies.
Outside the scope of Embedded Value, there are no Ageas companies
that provide services related to the life business, such as distribution
channels.
The total unallocated central overhead in 2016 amounted to EUR 102
million (2015: EUR 72 million). The share for the Life insurance activities
of these expenses or any recurrence of these has not been included in
the year-end Embedded Value or Value Added by New Business.
4.7.2
Expense inflation
The expense inflation assumption is used to increase future expenses
and is based on observed price inflation index as well as wage inflation.
4.9
Required equity
Expected return
The “expected return at the reference rate” shows the projected
change over one year forward at risk free applicable at the start of the
year. The VIF contains also the unwinding at the first year risk free rate.
The VIF increases as all future profits now require one year less
discounting.
The “expected return in excess of reference rate” is the additional
Embedded Value expected to be created if “real world” expected
investment returns applicable at the year-start were to emerge. It also
includes the release from risks with respect to options and guarantees
and non-financial and residual non-hedgeable risks. The margin for the
year built into the valuation for uncertainty with regards to asymmetric
financial risk and non-financial risk is released in this step.
The “transfer to shareholders’ equity” shows the effect of the
realization of the projected net profits from the VIF and the release of
Required Equity. The change on shareholders’ equity has no impact on
the Embedded Value overall as it contains the release of profits included in the VIF to the Free Surplus during the year.
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Ageas – Embedded Value Report 2016
4.10
Equity reconciliation
To arrive at the Value of Shareholder’s Equity for Embedded Value an
adjustment is made to reallocate Unrealised Capital Gains. Under IFRS,
all Unrealised Capital Gains, including those on assets backing
technical provisions are accounted for as Shareholder Equity. For
Embedded Value purposes these assets, including their Unrealised
Capital Gains/Losses, are projected and valued as part of the Value of
In-Force business and therefore need to be excluded from the EEV
Shareholder’s Equity.
account a certain target allocation based on market value, this
shock may lead to a rebalancing of the modelled assets at the
end of the first year, when defined boundaries for each asset
class are exceeded;

The line "Valuation adjustment Technical Provisions" includes several
adjustments, including unallocated profit sharing and shadow
accounting, whereas “Market value adjustments” relates to the
revaluation to market value of the real estate and Held to Maturity
portfolio.
Volatilities equities and properties +25% – This sensitivity
assumes a 25% increase of both the equity and real estate
volatility by multiplying the base assumption by a factor of 125%.
As Ageas’ entities show a low exposure to equities and
properties, this sensitivity test has a limited impact on the overall
EV;

Volatilities risk-free yields +25% – This sensitivity assumes a 25%
increase of the volatility of the risk free yields by multiplying the
base assumption by a factor of 125%;
4.11

Volatility Adjuster 0 bp – This sensitivity assumes the Volatility
Adjuster are set at 0 for all currencies, or in other words, a
reference rate equal to the risk free rate;

Volatility Adjuster +10 bp – This sensitivity assumes the Volatility
Adjuster includes 10bp on the existing Volatility Adjuster for Euro,
Hong Kong Dollar and US Dollar;

Required equity (Solvency II Pillar 1 SCR) – This sensitivity
assumes that the Required Capital to hold is only to meet the
Solvency II Pillar 1 capital. This sensitivity is assumed to impact
the Frictional Cost of Capital and the Cost of Non-Hedgeable
Risks resulting from a lower level of Shareholders Equity needed
to meet this level of Required Capital.

Costs -10% – all maintenance costs excluding commissions and
acquisition expenses decrease by 10%. Cost inflation remains
unchanged;

Lapse rates -10% – This sensitivity assumes that the lapse rates
used in the base scenario are multiplied by a factor of 90%;

Mortality rates -5% – This sensitivity assumes that the mortality
rates used in the base scenario are multiplied by a factor of 95%.
This has been applied on both annuity and life assurance
business.
Sensitivities
Following the CFO Forum guidance sensitivities are required to be
provided for the in-force portfolio and the new business. These
sensitivities are performed with respect to underlying best estimate
assumptions and based on current market conditions as at 31
December 2016. Both economic and non-economic sensitivities are
tested. The same management actions and policyholder behaviours
have been assumed in the sensitivities as for the base case. Each
sensitivity analysis is calculated by changing the relevant assumption
in isolation. It does not take into account second order effects this may
have on other assumptions underlying the projections.

Reference rate + 100 bps – This sensitivity assumes an upward
shift of 100 bps in the reference rate and still converging to the
UFR of 4.2% following the changed yield curve methodology;

Reference rate -100 bps – This sensitivity assumes a downward
shift of 100 bps in the reference rate, no longer floored at 0% and
converging to the UFR of 4.2%, taking into account any possible
management actions on the guaranteed interest rates. In this
sensitivity no repricing of new business has been applied. Due to
the asymmetric and non-linear impact of embedded financial
options and guarantees, falling market rates have a higher impact
on EV than rising interest rates;

Asset values of equities and real estate -10% – This sensitivity
assumes a decrease of the asset values of both equities and real
estate by 10%. Since the modelled investment strategies take into
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Ageas – Embedded Value Report 2016
5 Cautionary statements
This report is intended to provide financial markets with additional
financial information. The figures are provided for information purposes
only and are subject to the conditions and restrictions mentioned
hereafter.
Certain of the statements contained herein are statements of future
expectations and other forward-looking statements that are based on
management's current views and assumptions and involve known and
unknown risks and uncertainties that could cause actual results,
performance or events to differ materially from those expressed or
implied in such statements. Future actual results, performance or
events may differ materially from those in such statements due to,
without limitation, (i) general economic conditions, including in
particular economic conditions in Ageas’ core markets, (ii)
performance of financial markets, (iii) the frequency and severity of
insured loss events, (iv) mortality and morbidity levels and trends, (v)
persistency levels, (vi) interest rate levels, (vii) currency exchange
rates, (viii) increasing levels of competition, (ix) changes in laws and
regulations, including monetary convergence and the Economic and
Monetary Union, (x) changes in the policies of central banks and/or
foreign governments and (xi) general competitive factors, in each case
on a global, regional and/or national basis.
In addition, the financial information contained in this presentation,
including the pro forma information contained herein, is unaudited and
is provided for illustrative purposes only. It does not purport to be
indicative of what the actual results of operations or financial condition
of Ageas and its subsidiaries would have been had these events
occurred or transactions been consummated on or as of the dates
indicated, nor does it purport to be indicative of the results of
operations or financial condition that may be achieved in the future.
No warranty can be given by Ageas, either explicitly or implicitly,
regarding the reasonableness, correctness or completeness of the
information, forecasts and assumptions contained in these pages. The
information here provided could be subject to changes. This report and
the information contained herein in no way replace any formal
reporting. Investment considerations should continue to be based on
periodical reporting and other information Ageas is required to disclose
by law or stock exchange regulations.
020
Ageas – Embedded Value Report 2016
6 Limited assurance report on the Ageas
Embedded Value report 2016
6.1
Introduction
We were engaged by the Board of Directors of Ageas SA/NV
(hereafter: “the Board of Directors”) to report in the form of an
independent limited assurance conclusion on the Ageas’ Embedded
Value Report for the covered life insurance business as at 31 December
2016 including the related movements in embedded value, including
restatements and operating embedded value earnings, the new
business value and the sensitivities (as stated on pages 1 to 19), for
the year then ended and management’s statement thereon (the “Ageas
2016 Embedded Value Report”) that based on our work performed and
evidence obtained, nothing has come to our attention that causes us to
believe that the Ageas 2016 Embedded Value Report is not properly
prepared, in all material respects, in accordance with the following
Principles as set out on page 13 of the Ageas 2016 Embedded Value
Report, the “EEV Principles”:
 The European Embedded Value Principles and Guidance as
developed by the CFO Forum and issued in April 2016.
 Additional Guidance on European Embedded Value Disclosures,
issued April 2016.
 Principles 2 - 6, 7.1, 7.2, 7.4, 8, 9.1 – 9.3, 9.8, 10, 11.1 – 11.5,
11.7 – 11.10, 11.13, 11.15 – 11.16, 12 - 16, 17.1 – 17.2 from the
Market Consistent Embedded Value Principles issued April 2016.
6.2
Ageas’ responsibilities
The Board of Directors is responsible for the preparation and
presentation of the Ageas 2016 Embedded Value Report in accordance
with the EEV Principles that is free from material misstatements and for
the determination of the assumptions to be used, and information
contained therein.
This responsibility includes designing, implementing and maintaining
internal control relevant to the preparation and presentation of the
Ageas 2016 Embedded Value Report that is free from material
misstatement, whether due to fraud or error. It also includes selecting
and applying the appropriate methodology; and using assumptions
that are reasonable in the circumstances; selecting and applying
policies; making judgments and estimates that are reasonable in the
circumstances; and maintaining adequate records in relation to the
Ageas 2016 Embedded Value Report.
The Board of Directors is also responsible for preventing and detecting
fraud and for identifying and ensuring that Ageas complies with laws
and regulations applicable to its activities. The Board of Directors is
responsible for ensuring staff involved in the preparation of the Ageas
2016 Embedded Value Report are properly trained, systems are
properly updated and that any changes in reporting encompass all
significant business units.
6.3
Our Responsibilities
Our responsibility is to examine the Ageas 2016 Embedded Value
Report prepared in accordance with the EEV principles by Ageas and
to report thereon in the form of an independent limited assurance
conclusion based on the evidence obtained.
We conducted our engagement in accordance with International
Standard on Assurance Engagements (ISAE) 3000, Assurance
engagements other than audits or reviews of historical financial
information, issued by the International Auditing and Assurance
Standards Board. That standard requires that we plan and perform our
procedures to obtain a meaningful level of assurance whether nothing
has come to our attention that causes us to believe that the Ageas 2016
Embedded Value Report is not properly prepared, in all material
respects, in accordance with EEV principles.
021
Ageas – Embedded Value Report 2016
The firm applies International Standard on Quality Control 1 and
accordingly maintains a comprehensive system of quality control
including documented policies and procedures regarding compliance
with ethical requirements, professional standards and applicable legal
and regulatory requirements.
We have complied with the independence and other ethical
requirements of the Code of Ethics for Professional Accountants issued
by the International Ethics Standards Board for Accountants, which is
founded on fundamental principles of integrity, objectivity, professional
competence and due care, confidentiality and professional behaviour.
The procedures selected depend on our understanding of the
preparation and presentation of the Ageas 2016 Embedded Value
Report, and other engagement circumstances, including our
consideration of areas where material deviations to EEV principles are
likely to arise. In obtaining our understanding of the Ageas 2016
Embedded Value Report and other engagement circumstances, we
have considered the process used to prepare the Ageas 2016
Embedded Value Report in order to design assurance procedures that
are appropriate in the circumstances, but not for the purposes of
expressing a conclusion as to the effectiveness of Ageas's process or
internal control over the preparation and presentation of the Ageas
2016 Embedded Value Report.
Our engagement also included:
evaluating the appropriateness of the compilation process of the
Ageas 2016 Embedded Value Report and the appropriateness of
the methods, policies and procedures used in the preparation of
the Ageas 2016 Embedded Value Report as well as the
determination process of the assumptions described on pages 13
to 19 of the Ageas 2016 Embedded Value Report,
 verifying the consistent application of the methodology in all
significant components of the Ageas group.
 performing analytical procedures on the results of the calculations
of the embedded value as at 31 December 2016 and the 2016
movements.

The procedures performed in a limited assurance engagement vary in
nature and timing from, and are less in extent than for, a reasonable
assurance engagement. Consequently, the level of assurance obtained
in a limited assurance engagement is substantially lower than the
assurance that would have been obtained had a reasonable assurance
engagement been performed. We did not perform model validation
procedures and/or reperformance of calculations to assess the
reliability of the models involved, nor did we assess the completeness
and correctness of the calculations in those models underlying the
Ageas 2016 Embedded Value Report, that would have been performed
if this were a reasonable assurance engagement.
As part of this engagement, we have not performed any procedures by
way of audit, review or verification of the Ageas 2016 Embedded Value
Report nor of the underlying records or other sources from which the
Ageas 2016 Embedded Value Report was extracted.
6.4
Criteria
We refer to the section introduction for the description of the EEV
principles which were used as criteria for this limited assurance
engagement.
6.5
Conclusion
Our conclusion has been formed on the basis of, and is subject to, the
matters outlined in this report. We believe that the evidence we have
obtained is sufficient and appropriate to provide a basis for our
conclusion.
Based on our procedures performed and evidence obtained, nothing
has come to our attention that causes us to believe that the Ageas 2016
Embedded Value Report is not properly prepared, in all material
respects, in accordance with the EEV principles.
6.6
Other matters
We draw attention to chapter 5 of the Embedded Value Report, which
indicates that the calculations underlying the Embedded Value Report
are necessarily based on numerous assumptions with respect to
economic conditions, operating conditions, political conditions and
other matters with respect to future cash flows. Many of these are
beyond the control of Ageas and actual cash flows in the future are
likely to be different from those assumed in the calculation and such
variation may be material.
Brussels, 4 April 2017
KPMG Réviseurs d’Entreprises/Bedrijfsrevisoren
Represented by
K. Tanghe
022
Ageas – Embedded Value Report 2016
Annex I:
Components of Embedded Value
The components of the Embedded Value are:
Embedded Value (EV)
= Value of Shareholder's Equity (VSE)
+ Value of In-Force Business (VIF)
Value of Shareholder's Equity (VSE)
= Free Surplus (FS)
+ Required Equity (RE)
Value of In-Force Business (VIF)
= Certainty Equivalent Value (CEQ)
- Time value of Financial Options and Guarantees (TFOG)
- Cost of Non-Hedgeable Risks (CNHR)
- Frictional Costs of Capital (COC)
1
Value of Shareholder’s Equity (VSE)
The Value of Shareholder’s Equity equals the market value of the
tangible assets backing Ageas’ Life Equity including adjustments to
ensure consistency with the calculation of the Value of In-Force
Business. For example, unrealised capital gains that originate from
assets backing the customer liabilities but appear on the IFRS balance
sheet within shareholder equity are modeled within the Value of InForce Business and therefore are deducted from the value of
shareholder equity. Intangible assets such as VOBA and DAC are given
no value because the Embedded Value they represent is valued
explicitly within the Value of In-Force. See section 2.6 for an overview
of the reconciliation from IFRS to the Value of Shareholder’s Equity.
The Value of Shareholder’s Equity breaks down into two components,
the Required Equity and Free Surplus.
1.1 Required Equity (RE)
The operating business cannot exist without Ageas meeting a number
of solvency capital requirements including local regulatory, rating
agency and economic capital. Meeting these requirements
necessitates locking in of a portion of the Shareholder Equity. This
Required Equity represents the amount of Shareholder Equity that, in
combination with other admissible capital items (such as subordinated
liabilities) that are allowed to fund the overall capital needs, is required
to meet the local solvency capital level.
All Ageas businesses must hold sufficient solvency capital to meet their
local regulatory requirements and target a buffer above this to ensure
they can withstand a range of adverse events. The level solvency
capital is usually funded with a combination of Shareholder’s Equity
and other admissible capital items such as debt instruments. For
Embedded Value reporting, the amount of Required Equity to meet the
solvency capital level should only contain the Shareholder’s part.
The Solvency II Pillar 2 required capital is translated into the Required
Capital for valuation purposes following the subtraction method. The
principle of this method is to assume that a surplus above local target
capital is really free for distribution and that the remainder is needed to
meet the solvency requirements and the amount of free capital should
therefore be consistent in any framework. Therefore, by assuming a
fixed amount of free surplus, any remaining amount of Shareholder’s
Equity should automatically be locked in for solvency requirements.
It is possible that the Required Equity in the Embedded Value differs
from the Solvency requirement. This is the result of non-Embedded
Value elements that qualify as Solvency II Available Capital e.g.
subordinated liabilities and components that are part of Value of InForce Business under Embedded Value e.g. unrealized capital gains.
1.2 Free Surplus (FS)
Free Surplus is the market value of assets allocated to the operating
business over and above the amount required to support the operating
business (i.e. the Required Equity) under the local regulatory regime.
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Ageas – Embedded Value Report 2016
2
Value of In-Force business (VIF)
The Value of In-Force business represents the value of assets and
liabilities based on a market-consistent valuation approach. It reflects
the risk-adjusted value of the expected cash flows emerging from the
In-Force policies and is valued by deducting the market consistent
value of liabilities from the market value of assets. The Value of In-Force
represents the value of In-Force life insurance activities at the valuation
date and excludes any value of business that is expected to be sold in
the future.
2.1 Present Value of Future Profits (PVFP)
Present Value of Future Profits (Certainty Equivalent Value, CEQ)
corresponds to the value of the business without taking credit for any
future investment risk premiums and represents the value as if all cash
flows are fixed and certain and all investment assets earn a return equal
to the reference rate (risk free return), with the cash flows discounted
at the same reference rate. This value captures the intrinsic value (or
in-the-money value) of the financial options and guarantees. The
reference rate is defined in section 4.6.1.
2.2 Time value of Financial Options and Guarantees (TFOG)
The Time value of Financial Options and Guarantees (TFOG) places a
value on the asymmetry of shareholder profits around the expected
cost of financial options and guarantees embedded in the insurance
cash flows. It is determined based on stochastic techniques. Due to the
complex nature of options in insurance contracts, a range of economic
scenarios are simulated to project cashflows. The TFOG is then
calculated as the difference between the Certainty Equivalent Value
and the value resulting from the cash flows under the different
economic scenarios.
The contractual financial options and guarantees include guaranteed
interest rates, profit sharing arrangements and minimum surrender and
maturity benefits. Stochastic scenarios include management decisions
that may vary under different scenarios, such as portfolio rebalancing
and discretionary profit sharing. All material financial options and
guarantees in the portfolio are accounted for in the Embedded Value.
2.3 Cost of Non-Hedgeable Risks (CNHR)
The Cost of Non-Hedgeable Risks is an allowance for risks that are
currently not allowed for in the Cost of Financial Options and
Guarantees, including those which cannot be hedged as a result of the
absence of liquid and well developed markets for these risks. While
within a market consistent framework the financial risks arising from
options and guarantees are addressed through the TFOG, an
additional separate adjustment is necessary for all other risks. The
CNHR is an explicit deduction to the Certainty Equivalent value to place
a value on the uncertainty of shareholder profits around the expected
insurance and non-hedgeable risks embedded in the insurance cash
flows.
The CNHR is calculated based on an annual charge on a part of the
solvency capital required to be held for these specific risks. This is
structurally in-line with our understanding of the approach proposed for
calculating the Risk Margin under Solvency II.
The annual charge on the solvency capital held for these risks is
calculated by a 0.5% post-tax charge of the projected total Required
Equity each year.
2.4 Frictional Cost of Capital (CoC)
The Required Equity is the part of shareholders equity needed to
support the life insurance activities. Since this part of Shareholders
Equity is locked in and can only be released to the shareholder over
time in line with the run-off of the business, the shareholder can only
benefit via the investment yield earned on the investment assets
backing the required equity and therefore pays both the tax costs on
this investment yield as well as any investment expenses. The Frictional
Cost of Capital represents the value lost through incurring these tax
and investment expenses on the Required Equity.
The remaining part of Shareholder Equity, the Free Surplus, is assumed
not to incur a cost of capital because it could in principle be released
without constraint and therefore avoid additional tax and investment
expenses.